Share prices explained

At some point, companies find the need to raise significant sums of money, whether to hire a crop of specialised workers or build a new office block. Whatever the reason for wanting to raise money, companies have two choices: borrow the money or issue shares of stock in the company to raise money from investors. Many companies choose to sell their shares of stock in order to raise money. Here’s how share prices are set explained in brief.

An initial public offering (IPO)

Companies go public through an initial public offering (IPO) in order to trade their shares. When this happens, an investment bank evaluates current and projected company performance to determine both the stock value and share price for the business. This is usually how most share prices are set and explained to firms looking to raise funds.

The bank may, however, also determine the value of an IPO share price for a company by calculating the net present value of the firm or by comparing the company with a similar company’s IPO. In these two cases, the bank will meet with investors to deliberate on the best IPO price for the company. The company then meets with the exchange to determine if the set IPO price is fair.

Share price market forces

Once a fair IPO share price has been set and trading starts, the share price is largely determined by the forces of supply and demand. The company with the best long-term earning potential may attract more buyers and consequently enjoy an increase in share prices due to high demand for its shares. On the other hand, a company that demonstrates poor earning potential may attract more sellers than buyers and suffer lower prices.

A continuous drop in share prices is called a downtrend, while a continuous rise in share prices is known as an uptrend. Sustained uptrends create what is referred as a "bull" market and sustained downtrends create what is called a "bear" market.

Share price spikes

Other factors that can affect how share prices are set and explained once trading has started include political events, economic news and financial and earnings reports. These factors can cause sudden or temporary price changes (spikes) that are extremely difficult, if not impossible, to predict. There is no magical formula to predict which shares will hit big. The best way to understand how the market prices fluctuate is to carefully study market trends.